RAMALLAH, West Bank, Aug 16 (Tom Perry/Reuters) - The Palestinian Authority's budget is in the red and donors should make good on pledges to fill the gap, said Norway's foreign minister, who chairs a donor group that backs the Palestinian government.

Jonas Gahr Stoere also said he was optimistic face-to-face Palestinian-Israeli talks would resume soon, restarting the peace process his country helped to launch 17 years ago.

If these negotiations get going now, I think that should be at the same time a message to donors -- and I would in particular address donors in the Arab world, the Gulf world -- to seize this opportunity, he told Reuters in an interview in Ramallah late on Sunday.

According to the accounts we run, the budget support to Prime Minister (Salam) Fayyad's government is running into the red, and that is high-risk, Stoere said. The day will come that the Palestinians can do without donors.... But that moment is not now.

He described the gap between donor pledges and actual contributions as important but declined to give figures.

Fayyad's Ramallah-based Palestinian Authority has projected a budget shortfall of $1.2 billion for this fiscal year, or 16 percent of the territories' GDP.

Any donor failure to make good on pledges would derail efforts to boost the growth of the Palestinian economy, Stoere said. I hope that by September we are able to demonstrate that the budget support is according to expectations.

Donor aid for Fayyad's government has helped drive economic growth in the West Bank, which Stoere put at 10 percent.


BOTTOM-UP APPROACH

Support for the Palestinians is vital to what Stoere described as a bottom-up approach to settling the six-decade-old Palestinian-Israeli conflict through building accountable and transparent Palestinians institutions.

He described the negotiation process which the United States is trying to revive through the launch of direct talks as the top-down part of the equation.

Norway played a vital role in launching the diplomatic process by hosting secret Israeli-Palestinian negotiations that produced the Oslo Accords, an interim peace deal, in 1993.

When you analyse it, it's going to be very complicated. Both parties have internal complications. But when I speak to the (Israeli) prime minister, I speak to the (Palestinian) president, my sense is that the alternative is worse, he said.

I think it should be possible to devise a common interest in talking, getting going, but that is something where the Americans are key.

The United States has mediated three months of indirect, proximity talks between the sides which have not negotiated face-to-face since late 2008. U.S. President Barack Obama has said he wants direct talks to begin by September.

I choose to be modestly optimistic, Stoere said.

There is ample pessimism among Israelis and Palestinians, who have grown tired of a peace process interrupted by violence and other actions that have eroded confidence on both sides.

Approaching this conflict by being an eternal pessimist is a fairly safe bet, Stoere said. But it's not where we can place ourselves as politicians and I think we have to look for the opportunities because the alternative is worse. (Editing by Peter Graff)